Goldman: Investors should switch to Shell from BP
Investors should switch to Royal Dutch Shell Plc from BP Plc as Europe's largest oil company has underperformed its rival the past month and will offer better cash-flow growth from 2010-13, Goldman Sachs Group Inc. said.
Goldman raised Shell, based in The Hague, to ``buy'' from ``neutral'' and lowered BP to ``neutral'' from ``buy,'' London- based analyst Michele Della Vigna said today in a note to investors.
London-based BP, Europe's second-largest oil company, has outperformed its competitor by 10 percent the past month and is close to the top of a two-year relative trading range with Shell, Vigna said. Crude oil has plunged more than 50 percent since reaching a record $147.27 a barrel in July.
Shell's Class A shares traded in London gained as much as 8 percent today and were up 72 pence at 1,366 pence as of 12:06 p.m. local time. BP added 4.6 percent to 415.75 pence.
``The five major new projects that Shell is developing will add $10 billion extra cash flow to Shell by 2012,'' Vigna said in the report. ``We believe that the high exposure to marketing will provide an edge versus the fall in crude prices, leaving the company better positioned than the rest of the industry in a falling crude price environment.''
New Projects
Shell's new projects scheduled to start from 2010 include the Pearl gas-to-liquids development in Qatar and the Canadian oil sands Athabasca expansion. It also plans to press ahead with the deepwater Perdido development in the Gulf of Mexico, the Sakhalin 2 project off Russia's eastern coast and the Qatargas 4 LNG project. These will add $10 billion of extra cash flow to Shell by about 2012, based on oil at $85 a barrel, Goldman said.
Goldman said the main risk for Shell is its high capital expenditure program at a time of falling oil prices, which could affect cash flow.
Still, Goldman said Shell has one of the ``most healthy'' balance sheets in the industry and could sustain two years of oil at $50 a barrel and still have a similar debt to capital ratio as BP at about 19 percent.
BP's third-quarter earnings are scheduled to be released on Oct. 28, followed by Shell on Oct. 30.